1. Technical Field
The present invention relates generally to data processing systems and networks of data processing systems, and more specifically to systems which allow individuals to trade securities directly with other individuals who are not brokers, specialist or market makers.
2. Description of the Related Art
For hundreds of years, institutions have existed which allow people to buy and sell securities (e.g., stocks, futures, options, commodities, etc.) from one another. Today, examples of these institutions are: The New York Stock Exchange (NYSE), The National Association of Security Dealers Automated Quotation (NASDAQ) System, and The American Stock Exchange (AMEX). These modern security exchanges facilitate the exchange of several hundred million shares of stock every business day.
While a significant portion of this trading is initiated by individuals, either directly or indirectly, these individuals cannot trade securities directly on the above mentioned exchanges. If a user wishes to buy or sell stock or other securities, they must go through a brokerage firm or a stock broker. These brokers are the ones who actually execute a customer's order to buy or sell a security.
There are two primary ways brokers generate income from executing customer orders. First, brokers often charge a commission for executing a customer's order. Depending on the broker, this commission may vary with the number of shares traded. For example, a broker may charge a base rate of $50.00 to execute a trade, plus an-additional 5 cents per share for every share traded. There is nothing secretive about the commission a broker charges, and customers are familiar with the commissions charged by their brokers.
A second way brokers derive income from customers is by taking advantage of the difference between the selling (ask) price and the buying (bid) price of a security. Unlike most consumer items, securities are often listed at two prices: a first price if one is buying the security, and a second price if one is selling the security. The selling price is known as the ask price and the buying price is known as the bid price. For example, if a user asks Broker A for the price of a share of stock from ABC Company, the broker may tell the customer that a share of ABC stock can be bought for $50.50, and a share of ABC stock may be sold for $50.10. The bid and ask price are not numbers set by a single entity or government agency, rather, these numbers are generated by a broker and constantly fluctuate as the price of a security moves up or down. The difference between the bid price and the ask price is known as the spread.
A broker can make money on the spread by connecting customers who want to sell a security at a relatively low price with other customers who wish to buy a security at relatively high price. Due to the advanced nature of today's communications systems, a broker is in constant contact with many other brokers and institutions which buy and sell securities. These other brokers and institutions are constantly communicating to a given broker various offers to buy and sell securities, at a range of prices.
As stated above, a broker can make money from executing a customer's order by connecting two customers who are willing to pay different amounts for the same security. For instance, Customer A goes to Broker B and informs Broker B that he wishes to buy one hundred shares of ABC stock for $50.00. Broker B can then log into his communications network to see what other brokers and institutions are charging for one hundred shares of ABC. Broker B may find another broker willing to sell one hundred shares of ABC for $49.50. In this instance, Broker B will, on behalf of Customer A, buy one hundred shares of ABC for the price of $49.50. However, Customer A will be charged $50.00 per share for the stock that Broker B bought for $49.50 per share. Thus, Broker B will be able to keep 50 cents per share, or $50.00 for the one hundred shares of ABC purchased. This type of profit making is allowed to happen, despite the many regulations that brokers operate under. This same situation repeats itself when a broker finds another user willing to pay a higher price than what a given seller is asking.
The above situation repeats itself many times a day, and creates substantial revenues for commodity and stock brokers. Further, a customer has no way to protect himself from this type of exploitation, since customers do not have access to the communications networks of the broker. Also, customers often do not realize a broker is making money from them in this fashion.
Another advantage brokers enjoy over consumers is that they can make markets in a given security. Making a market in a given security refers to the situation where a broker is simultaneously buying and selling the same security at slightly different prices. Brokers can make markets by being connected to many other brokers and institutions. A broker generates income by making markets because he can sell a security for a slightly higher price that he buy the same security. If a broker can repeatedly sell a given security for 50 cents more than he buys it, this broker can continue the process and generate income by taking advantage of the fact that he can sell a security for more than he can buy it.
Individuals are unable to make markets in securities because they do not have access to the large communications networks that brokers have access. To effectively make a market, one must be able to communicate with many potential buyers and sellers of the security in which one wishes to make a market. This ability is easily accomplished by brokers, but, as stated above, individuals do not have access to the resources needed to make markets.
Therefore, what is needed is a data processing system and a network of data processing systems whereby individuals can buy and sell directly from each other, with only minimal involvement by a broker. In such a communications network an individual would be in a similar position to that of a broker, i.e, an individual would have access to many other individuals wishing to buy and sell securities. In such a network, an individual would be able to select among many competing offers to buy and sell, and thus would be able to get a better deal than if they were going though a broker. Also, such a network would allow individuals to make markets in the securities they wish.